Banks May Lose N106.9bn to Investments in FGN Bonds

Nineteen banks may lose about N106.9 billion in their Held-to-Maturity (HTM) FGN bonds as well as their Available for Sale (AFS) FGN bonds, THISDAY learnt Monday.

A breakdown of this showed that while a total of 15 banks carry potential loss of about N102.4 billion on their HTM FGN bonds, five others may lose about N4.5 billion on their AFS FGN bonds.

This formed part of a report titled: ‘State of the Economy and Update on the Regular Monetary Policy Committee (MPC) Meeting’, presented by the Central Bank of Nigeria (CBN) to the Bankers’ Committee at its recent meeting, a copy of which was obtained exclusively by THISDAY.

Held-to-maturity securities are purchased with the intention of holding the investment to maturity, while AFS debts are purchased with the intention of selling before it reaches maturity.

Although the document did not give reasons that might make the banks record losses on their investments in the aforementioned class of fixed income securities, the Managing Director of a leading financial market consulting firm in Lagos, who spoke to THISDAY on the condition of anonymity Monday, said the development could be attributed to “economic loss of economic or opportunity cost.”

“Inflation also has a negative impact on real rates of return because it reduces the purchasing power of the investment income, especially when you consider the opportunity cost,” he added.
He maintained that with the current single-digit inflation, banks and other investors in the bond market would be worse off if the MPC decides to cut the benchmark interest rate at its meeting this month.

However, a Senior Analyst at BGL Securities Limited, Mr. Femi Ademola, argued that the only way an “investor would suffer losses in HTM bonds is when you mark-to-market or you re-classify the asset.”

For AFS, he explained: “You know you have to mark-to-market periodically, so if the purchasing price is lower than the market price that is when you record a loss.”
Also, the CBN document showed that banks’ combined liquid assets had been dominated by treasury bills, which accounted for 28.11 per cent of total assets. Asset Management Corporation of Nigeria (AMCON) bonds represented 23.39 per cent while FGN Bonds accounted for 20.62 per cent.

However, the central bank in the document disclosed that should the losses eventually crystallise, three banks’ Capital Adequacy Ratio (CAR), which measures the ratio of a bank's capital to risk would fall below the requirement by N437.8 billion.

The CBN also stated that none of the five banks with potential losses of about N4.5 billion would suffer a reduction in their CAR should the expected deficit occur. It also declared that the industry average CAR had improved and remained strong at 18.1 per cent by December 2012 compared to 17.9 per cent in the previous year.

CBN said in its assessment of the banking sector that industry average Tier 1 capital to Risk Weighted Assets (RWA) ratio stood at 16.1 per cent in December against 15.9 per cent in 2011.
It was further revealed that although none of the bank had a negative net interest income last year, compared with two banks in 2011, two banks nevertheless, posted unaudited losses for 2012.

According to the central bank, even though banks’ total operating expenses dropped by 35.40 per cent to about N1 trillion in 2012 from about N1.6 trillion in 2011, total operating income also declined by 7.43 per cent to about N1.4 trillion in 2012, from about N1.6 trillion in the previous year.

Also, industry total loans were said to have increased by 12.7 per cent to about N8.1 trillion last December compared to about N7.2 trillion in 2011 while the ratio of non-performing loans (NPL) to total loans fell from 4.3 per cent in June to 3.50 per cent in December.

CBN noted that although the industry NPL ratio hovered below the five per cent threshold in December, a significant number of banks operated above the threshold.
The report said all banks complied with regulatory liquidity ratio requirement, which stood at 68.0 per cent in December.

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